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Why Are State and National Wages Different?

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Why do wage differences occur?

• What explains differences in the average wage between a given state and the U.S.?

• Industry mix? • Overall wage rates across industries?

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Differences in wages

• The difference between a state’s average wage and U.S. average wage can be decomposed into the Industry Mix Effect and the Level Effect.

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Differences in Average wage

• The Industry Mix Effect gets at the impact of the state’s industry mix on the average wage.

• States with an industry mix tilted towards high-wage industries will enjoy a higher overall wage.

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Differences in Average wage

• The Level Effect examines the magnitude of a state’s average wage industry-by-industry relative to the U.S.

• Given the industry mix, a state with higher wage industry-by-industry will enjoy higher overall average wage.

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Differences in Average wage

State Wage - U.S. Wage = Industry Mix Effect + Level Effect.

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Differences in Average wage

• Example: Tennessee average wage compared with the U.S. 2010:– Tennessee: $41,760– United States: $46,455– Difference: -$4,695– Question: how much of the difference is due to the Mix

Effect and how much to the Level Effect?– Data: private sector QCEW series.

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Determining the Industry Mix Effect

• The Industry Mix Effect is the portion of the state-U.S. wage difference that can be explained by the state’s particular employment distribution across industries.

• Example: a state with above average employment in a nationally high-wage industry will raise its average wage.

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Determining the Industry Mix Effect

• Questions: • What is a nationally high-wage industry?• What is an industry with above average

employment?

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Determining the Industry Mix Effect

• We can define a high-wage industry as having a wage higher than the national average wage.

• Define the Wage Margin = Industry Wage – Total Wage (both for the U.S.).

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Determining the Industry Mix EffectHigh-wage and low-wage industries for the U.S.

Wage Margin 2010

United States 2010 Avg wage

Wage Margin (Industry Wage -

Total Wage)Total 46,455 Natural Resources 49,820 3,365 Construction 49,597 3,142 Manufacturing 57,526 11,071 Trade, Transportation, and Utilities 39,109 (7,347) Information 74,395 27,940 Financial activities 73,977 27,522 Professional and Business Services 60,145 13,690 Education and health services 43,604 (2,852) Leisure and hospitality 19,387 (27,068) Other services 29,370 (17,085) Data: BLS, QCEW series.

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Determining the Industry Mix Effect

• What is an industry with above average employment?

• These industries for a state have a higher employment share compared with the national average.

• Definition:• Employment share difference = state

share of employment – U.S. share.

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Determining the Industry Mix EffectDetermining industries with above and below average employment for Tennessee

Employment Shares 2010

TennesseeUnited States

Employment Share

Difference (TN-US)

Natural Resources 0.005 0.017 -0.012Construction 0.047 0.052 -0.004Manufacturing 0.140 0.108 0.031Trade 0.258 0.230 0.028Information 0.021 0.025 -0.005Financial activities 0.064 0.070 -0.006Professional and Business Services 0.142 0.157 -0.015Education and health services 0.169 0.176 -0.006Leisure and hospitality 0.123 0.122 0.000Other services 0.032 0.041 -0.009Data: BLS, QCEW series.

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Determining the Industry Mix Effect

• To calculate the industry mix effect, multiply the Wage Margin by the Employment Share Difference, then add up.

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Determining the Industry Mix EffectIndustry Mix Effect A B

Wage Margin (Industry Wage -

Total Wage)

Employment Share

Difference (TN-US) A * B

Natural Resources 3,365 -0.012 (39.9) Construction 3,142 -0.004 (14.1) Manufacturing 11,071 0.031 347.1 Trade, Transportation, and Utilities (7,347) 0.028 (202.3) Information 27,940 -0.005 (133.0) Financial activities 27,522 -0.006 (169.3) Professional and Business Services 13,690 -0.015 (205.4) Education and health services (2,852) -0.006 17.6 Leisure and hospitality (27,068) 0.000 (1.9) Other services (17,085) -0.009 159.2

Industry Mix Effect (sum)>> (242.0)

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Determining the Industry Mix Effect• The industry mix effect for Tennessee

equals -$242.• This means that Tennessee’s average

wage is $242 lower than the U.S. average wage because of the state’s particular mix of industries.

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Determining the Level Effect• The Level Effect measures the portion of

the state-U.S. wage difference that is due to higher or lower wages industry-by-industry.

• Given the mix of industries, a state with higher wages industry-by-industry will enjoy a higher overall average wage.

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Determining the Level Effect• The Level Effect is the weighted average

of state-national wage differences industry-by-industry, using the state industry share as weights.

• Definition:Wage difference = state wage by industry – U.S. wage by industry.

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Determining the Level EffectA B

TennesseeUnited States

Wage Difference

(TN-US)

Tennessee Employment

Share A * BNatural Resources 39,285$ 49,820$ (10,536)$ 0.005 (53)$ Construction 44,292$ 49,597$ (5,305)$ 0.047 (250)$ Manufacturing 51,906$ 57,526$ (5,619)$ 0.140 (784)$ Trade 38,225$ 39,109$ (884)$ 0.258 (228)$ Information 54,052$ 74,395$ (20,343)$ 0.021 (421)$ Financial activities 59,474$ 73,977$ (14,502)$ 0.064 (922)$ Professional and Business Services 47,451$ 60,145$ (12,694)$ 0.142 (1,807)$ Education and health services 44,545$ 43,604$ 942$ 0.169 160$ Leisure and hospitality 18,579$ 19,387$ (808)$ 0.123 (99)$ Other services 27,882$ 29,370$ (1,488)$ 0.032 (47)$ Data: BLS, QCEW series. Level Effect (sum)>> (4,452)$

Average Annual Wage

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Determining the Industry Mix Effect• The Level Effect for Tennessee

equals -$4,452.• This means that Tennessee’s average

wage is $4,452 smaller than the U.S. because of lower wages by industry, holding industry mix constant.

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Differences in Average wage

• Tennessee average wage compared with the U.S. 2010:– Tennessee: $41,760– United States: $46,455– Difference: -$4,695• Difference due to industry mix: -$242• Difference due to wage level: -$4,452.

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Differences in Average wage

• Suppose a state wishes to target scarce resources for a policy that will move the state closer to the U.S. average wage.

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Closing Wage Differences

Which policy (in Tennessee’s case) is more supported by the facts?

1) Recruit and/or develop more businesses in higher-wage industries.

2) Institute policies (education, training, R&D) that result in higher productivity and higher wages across the board (over a broad set of industries).

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Appendix: Alaska

• Alaska average pay 2010: $47,171• U.S. average pay 2010: $46,455– Difference: + $716

• What explains the positive difference?

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Appendix: Alaska

• Alaska average pay 2010: $47,171• U.S. average pay 2010: $46,455– Difference: + $716

• What explains the positive difference?

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Appendix: AlaskaIndustry Mix Effect A B

Wage Margin (Industry Wage -Total Wage U.S.)

Employment Share

Difference (AK-US) A * B

Natural Resources 3,365 0.051 171.8 Construction 3,142 0.016 49.5 Manufacturing 11,071 -0.054 (602.9) Trade, Transportation, and Utilities (7,347) 0.034 (250.8) Information 27,940 0.002 48.0 Financial activities 27,522 -0.012 (331.1) Professional and Business Services 13,690 -0.047 (640.2) Education and health services (2,852) 0.000 (1.1) Leisure and hospitality (27,068) 0.010 (269.9) Other services (17,085) 0.002 (28.5)

Industry Mix Effect (sum)>> (1,855.1)

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Appendix: AlaskaLevel Effect A B

AlaskaUnited States

Wage Difference

(AK-US)

Alaska Employment

Share A * BNatural Resources 111,387$ 49,820$ 61,567$ 0.068 4,185$ Construction 70,392$ 49,597$ 20,795$ 0.067 1,403$ Manufacturing 38,486$ 57,526$ (19,040)$ 0.054 (1,023)$ Trade 40,701$ 39,109$ 1,592$ 0.264 421$ Information 55,014$ 74,395$ (19,381)$ 0.027 (527)$ Financial activities 50,693$ 73,977$ (23,284)$ 0.058 (1,343)$ Professional and Business Services 55,345$ 60,145$ (4,800)$ 0.111 (531)$ Education and health services 42,188$ 43,604$ (1,416)$ 0.176 (249)$ Leisure and hospitality 19,782$ 19,387$ 395$ 0.132 52$ Other services 33,770$ 29,370$ 4,400$ 0.043 188$ Data: BLS, QCEW series. Level Effect (sum)>> 2,577$

Average Annual Wage

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Differences in Average wage

• Alaska average wage compared with the U.S. 2010:– Alaska: $47,171– United States: $46,455– Difference: + $716• Difference due to industry mix effect: -$1,855• Difference due to level effect: +$2,577

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Differences in Average wage

• Are wages higher because Alaska is more productive, or because of a higher cost of living?

• Can Alaska gain by tweaking the industry mix?